Question 1.

A. What were the fallacies of the theory of mercantilism?

Answer:

Mercantilism had several fallacies:

• Zero-sum view of trade: Ignored mutually beneficial exchanges in trade.

• Emphasis on bullion accumulation: Overlooked production, consumption, and economic growth.
• Colonies as sources of wealth: Neglected economic development and limited trade
opportunities.
• Trade barriers and protectionism: Hindered competition, consumer choice, and economic
efficiency.
• Neglect of domestic consumption: Hurt standard of living for the general population.
• Lack of understanding of monetary theory: Ignored broader factors of prosperity.

While flawed, mercantilism influenced later economic theories.

B. Briefly describe the differences between the theories of absolute and comparative advantage. What were
the shortcomings of these theories?
Answer.
The theories of absolute advantage and comparative advantage are both concepts that explain the
benefits of international trade, but they approach the subject from different perspectives.

1. Absolute Advantage: This theory, introduced by Adam Smith, states that a country has an absolute
advantage in the production of a good if it can produce more of that good using the same amount of
resources compared to another country. In other words, a country is more efficient in producing a
particular good. The focus is on productivity and resource allocation.

2. Comparative Advantage: This theory, developed by David Ricardo, argues that even if one country has
an absolute advantage in producing all goods over another country, both countries can still benefit from
trade. Comparative advantage looks at the opportunity cost of producing a good, which is the value of the
next best alternative given up. A country should specialize in producing the good with the lower
opportunity cost and trade for goods produced more efficiently by another country.

Shortcomings of these theories include:

1. Immobile resources: Both theories assume that resources can easily move between industries or
countries to take advantage of specialization. In reality, resources such as labor and capital may not be
easily transferable, limiting the practical applicability of these theories.

2. Assumption of full employment: The theories assume full employment of resources within countries.
However, in reality, there may be unemployment or underutilization of resources, which can affect the
comparative advantage and the gains from trade.

3. Disregard for non-economic factors: The theories primarily focus on economic factors and overlook
other considerations, such as social, political, and environmental factors, which can impact trade decisions
and patterns.
 4. Distributional effects: The theories do not address the distributional consequences of trade. While
overall gains may occur, certain industries or groups within a country may be negatively affected, leading
to income inequality and potential social tensions.

5. Dynamic changes and technological progress: The theories assume a static world without considering
changes in technology, productivity, or comparative advantage over time. In reality, industries and
countries can improve their efficiency and alter their comparative advantage through technological
advancements and innovation.

Despite these shortcomings, the theories of absolute and comparative advantage remain fundamental concepts in
international trade and provide valuable insights into the benefits of specialization and exchange between
countries.

C. What problems or concerns may exist when GNI per capita is used as an indicator to evaluate national
economies and potential business opportunities? What other factors could be used?

Answer:

Using GNI per capita as an indicator for evaluating national economies and business opportunities has concerns:

1. Inequality and distribution are not accounted for.

2. Variations in the cost of living are ignored.
3. The informal economy may not be captured.
4. Non-economic factors like social development and infrastructure are overlooked.
5. Fluctuations and volatility can affect GNI per capita.

Other factors to consider:

1. Human Development Index (HDI) for a comprehensive view of development.
2. Purchasing Power Parity (PPP) to adjust for cost of living.
3. Economic diversification to assess resilience and innovation.
4. Business environment indicators like ease of doing business and stability.
5. Sustainability indicators for environmental and social considerations.

Using a combination of indicators is crucial for a more accurate assessment.

Question 2.

A. Compare and contrast the theories of absolute and comparative advantage.

Answer:

Absolute Advantage vs. Comparative Advantage:

- Absolute Advantage: One country can produce more using the same resources. Emphasizes productivity and
efficiency within a country's industries.

- Comparative Advantage: Even if one country has an absolute advantage in all goods, trade can still be
beneficial. Considers opportunity cost and specialization across countries.
- Focus: Absolute advantage looks at productivity and resource allocation within a country. Comparative
advantage compares production efficiencies between countries.

- Specialization and Trade: Absolute advantage suggests specializing in goods with a comparative advantage
and trading for others. Comparative advantage advocates specializing in goods with lower opportunity cost,
even without absolute advantage.

- Mutual Benefits: Absolute advantage can be more zero-sum, while comparative advantage highlights mutual
gains from trade.

- Policy Implications: Absolute advantage may support protectionism and subsidies. Comparative advantage
favors free trade and removing barriers.

Comparative advantage offers a broader framework for understanding trade benefits, focusing on efficiency
and specialization across countries.

B. How does Hecksher-Ohlin(HO) theory build on the earlier work of absolute and comparative advantage?
Answer:
The Heckscher-Ohlin (HO) theory builds on absolute and comparative advantage by incorporating factor
endowments as a determinant of comparative advantage and trade. It introduces the idea that countries
will specialize in and export goods that use their abundant factors of production, while importing goods
that require factors they are relatively scarce in. The HO theory extends the analysis beyond differences in
labor productivity and provides a more comprehensive framework for understanding trade patterns.

C. The Leontief paradox finds opposite trading patterns for the US to those predicted by the HO theory. How
can you resolve this paradox?
Answer:
The Leontief paradox, which found opposite trading patterns for the US compared to the predictions of
the HO theory, can be resolved through several explanations:

1. Differences in Capital Intensity: The US may have higher capital intensity in its industries, even though
it is capital-abundant overall.

2. Technological Advancements: Advanced technology in the US allows for efficient production of labor-
intensive goods and the export of those goods.

3. Product Differentiation: The US specializes in unique, high-quality goods that do not conform to simple
labor or capital intensity categorizations.

4. Non-Price Factors: Factors like transportation costs, trade barriers, and economies of scale influence
trade patterns alongside factor endowments.
 5. Measurement Issues: Limitations in data quality and measurement techniques can affect the analysis,
impacting the observed trade patterns.

Further research is needed to fully resolve the paradox and reconcile empirical findings with the predictions of the
HO theory.

Question 3.

A. Discuss the various stages of the international product life cycle. Give an example of a product that was
introduced to various countries under this theory.

Answer:

The international product life cycle (IPLC) theory describes the stages a product goes through in international
markets:

1. Introduction Stage: Product is introduced in the domestic market.

2. Growth Stage: Sales increase, and companies may export to similar markets.

3. Maturity Stage: Product reaches peak sales and may involve offshoring or local production.

4. Decline Stage: Sales decline due to changing preferences or market saturation.

An example is the personal computer (PC) industry. PCs were introduced in the US (introduction stage), expanded
globally (growth stage), reached maturity with offshoring and local production (maturity stage), and are now
declining due to new technologies (decline stage).

B. In deciding whether to export to another country or build their own sales or production site, based on
your knowledge of trade theory and theories of FDI, what are the major considerations for international
mangers making this choice?
Answer:
Considerations for international managers deciding between exporting and establishing a sales/production
site:

1. Market Access: Assess market size and potential.

2. Trade Barriers and Costs: Evaluate trade barriers and transportation/logistics costs.
3. Comparative Advantage: Utilize unique expertise/resources through FDI.
4. Local Market Knowledge: Gain insights into consumer preferences and business practices.
5. Cost and Control: Analyze cost-effectiveness and long-term cost control.
6. Political and Legal Factors: Consider political stability, legal frameworks, and regulations.
7. Risks and Flexibility: Assess market volatility and adaptability to changes.

Managers should analyze these factors to make an informed decision based on their company's goals and
circumstances.

Question 4.

A. “The world’s poorest countries cannot find anything to export. There is no resource that is abundant –
certainly not capital or land, and in small poor nations not even labor is abundant.” – Discuss.
 Answer:
Poor countries face challenges in finding exportable resources due to limited abundance in factors such as
capital, land, and labor. Small market size, lack of capital investment, and structural constraints further
limit their export potential. However, overcoming these challenges requires addressing structural issues,
investing in education and infrastructure, and promoting innovation. Poor countries can explore niche
markets, focus on value-added products, and leverage unique attributes for competitive advantages. With
the right strategies and supportive policies, they can participate in global trade.

B. Boeing is using world-class manufacturing facilities in Japan to supply components for its new Dreamliner.
Should Boeing consider building production plants in countries like India and China, where there are many
excellent lower-wage engineers? What factors should they take into account?
Answer:
When considering building production plants in countries like India and China, Boeing should consider
factors such as cost advantage, skill and expertise of engineers, supply chain logistics, intellectual property
protection, infrastructure and support, market potential, geopolitical stability, cultural considerations, and
long-term strategy. Thorough analysis of these factors is crucial for making an informed decision that
aligns with Boeing's goals.